The fact that Bay Area’s real estate market had a stellar 2014 is hardly news for anyone even remotely involved in the commercial real estate industry in the region. Anecdotal evidence is overwhelming. Traffic, rent increases (commercial and residential), record house prices and an ever-expanding lexicon of excuses explaining reasons one is late to meetings, are just some indicators.[contextly_sidebar id=”jdzmi1C2dqVwXRLH1s83tNYImsUtuZm8″]But this week marks the start of the commercial real estate reporting season, the annual ritual of tallying just how well the market performed across the region in the last quarter and the year as a whole. While we may be reminded that past performance does not guarantee similar results in the future, the velocity of the market seems to be maintaining its high levels in these very early days of 2015.
Across the region, technology continued to drive the market in 2014. Leasing activity in San Francisco brought the vacancy rate down to 6.6 percent, according to a report released by CBRE earlier this week. JLL, which also released its set of reports this week, pegged the rate at 9.8 percent, the difference being primarily in the methodology the two firms use to come up with the figures. In all fairness, CBRE has a rate of total availability pegged at 9.9 percent, which is nearly identical to JLL’s vacancy rate.
Both will agree that large tech deals made San Francisco one of the hottest markets in the nation, and possibly the world. Net absorption topped nearly 2 million square feet in San Francisco for the full year, according to both firms, led by a record 16 (JLL) or 17 (CBRE) deals over 100,000 square feet. These deals have pushed asking rents per square foot in the fourth quarter in San Francisco to $67.35 (CBRE) or $66.14 (JLL)—read remarkably high!
CBRE stated that investment sales came very close to the $6 billion record established in 2012; the figure for 2014 was $5.9 billion—indicating that investor confidence in the San Francisco market remains very high. A lack of supply, which is driven by Prop M in San Francisco amongst other reasons, is certainly one of the variables affecting that interest. There is roughly 3.2 million square feet of new development under way in the city, according to JLL, and over 10 million in the pipeline. The firm is tracking 241 leasing requirements, eight over 100,000 square feet, for a total of 5.6 million square feet.
Moving south to Silicon Valley, the story is much the same. While JLL pegs total vacancy at 13.8 percent, CBRE sees the vacancy rate at 8 percent and total availability at 10.3 percent. The relatively higher vacancy in Silicon Valley could also be accounted by a much larger pool of obsolete product. The market is tracking roughly 4.3 million square feet in construction, according to JLL, of which nearly 67 percent has been pre-leased. Using a different methodology, CBRE tallied 8.6 million square feet under construction.
Net absorption inched higher at 2.3 million square feet (JLL)—1.3 million square feet just in the fourth quarter, says CBRE, highest since 2000—but average asking rents broke new ground to get to $3.75 per square foot on a monthly basis, a new record, according to JLL. CBRE broke down the asking rents into categories of product, and the difference can be stark. Class A asking rents have reached $4.44 per square foot per month, Class B is at $3.48, while Class C is at $1.99.
The diversity and the scale of the market is evident in the figures, however. Downtown San Jose, North San Jose and Fremont/Milpitas sub-markets are still considered rising, according to JLL. Contrasting that are Cupertino, Palo Alto, Sunnyvale, Mountain View and Santa Clara, which are peaking. Overall, the South Bay region experienced its 15th consecutive quarter of net absorption. And the story may get even better. JLL is tracking 146 active requirements in the market, for a total of 8.2 million square feet. Eleven companies are looking for space in excess of 200,000 square feet, and a total of 20 are in the market for space over 100,000 square feet.
CBRE reports that the top lease in 2014 in Silicon Valley was a mystery tenant (
The story that is quietly evolving, however, is on the Peninsula. Edged between San Francisco and South Bay, the Peninsula provides a well-positioned geographic middle ground for families who work in the region. Employers are starting to take note of that, as well. Rents in the sub-market grew nearly 6 percent in 2014, although the range of rents can be pretty wide, depending on the city. They are $8.17 per square foot on a monthly basis in Menlo Park (JLL) and can be as high as $9 (CBRE) in some cases, but they drop pretty quickly as one moves north to $4.89 in Redwood City, according to JLL. Redwood Shores and Foster City, which seem like more traditional suburban office parks are recording asking rents at $4.69 and $4.67, respectively, while they drop to $3.84 in San Mateo, reports JLL. Overall, CBRE sees Class A asking rents averaging $5.24 across the Peninsula, dropping to $4.66 for Class B and $2.79 for Class C space, higher at levels than in the traditional tech market of Silicon Valley.
The net absorption on the Peninsula came to roughly 540,000 square feet of space, according to CBRE, with the biggest pushes coming in the second and fourth quarters. The largest lease in the market was recorded by EMC, which took 118,000 square feet in Menlo Park, while a mystery buyer (